Why This Popular Retirement Rule Is Wrong for You

Simple rules are always attractive, but they can lead you astray. Find a better way here.

Many people use what's called the 4% rule in planning for retirement. But even though the rule is easy to use, it doesn't always meet your retirement-income needs.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the 4% rule, noting that the danger with the rule is that a lot depends on the first few years after you retire. If the market suffers a big drawdown right after you retire, then the 4% rule can leave you dangerously overextended. But if the market starts a bull run, then the 4% rule might leave you short-changed. Dan suggests instead using a combination of asset allocation strategies and growth dividend stocks, citing Lockheed Martin (NYSE:LMT), AT&T (NYSE:T), and ConocoPhillips (NYSE:COP) as examples of stocks with track records of boosting income. The regular growth in dividends can let your portfolio income keep up with inflation while also providing growth prospects that can make you more flexible in choosing how much to withdraw based on market conditions.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
Follow @DanCaplinger